Datadog - Q1 2023
May 4, 2023
Transcript
Operator (participant)
All participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Yuka Broderick, Vice President of Investor Relations. Please go ahead.
Yuka Broderick (VP of Investor Relations)
Thank you, Michelle. Good morning, and thank you for joining us to review Datadog's Q1 2023 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's Co-founder and CEO, and David Obstler, Datadog's CFO. During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the Q2 and the fiscal year 2023 and related notes and assumptions, our growth margins and operating margins, our strategy, our product capabilities, and our ability to capitalize on market opportunities. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations.
These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31st, 2022. Additional information will be made available in our upcoming Form 10-Q for the fiscal quarter ended March 31st, 2023 and other filings for the SEC. This information is also available on the investor relations section of our website, along with a replay of this call. We will also discuss non-GAAP financial measures, which are reconciled to their most directly comparable GAAP financial measures in the tables in our earnings release, which is available at investors.datadoghq.com. I'd like to turn the call over to Olivier.
Olivier Pomel (Co-founder and CEO)
Thanks, Yuka. Thank you all for joining us this morning. We are pleased with our execution in Q1 as we continued broadening our platform, delivering new use cases for our existing users, as well as signing up more customers, all on a backdrop of continued macro uncertainty and optimization of cloud workloads. Let me start with a review of our Q1 financial performance. In Q1, revenue was $482 million, an increase of 33% year-over-year and above the high end of our guidance range. Note that this number factors in the impact of a service outage we experienced in March and which reduced our revenue for the quarter by about $5 million. We ended with about 25,500 customers, up from about 19,800 last year.
Also note that we are now including customers who joined following our acquisition of Cloudcraft, representing about 1,400 net new customers of Datadog this quarter. We ended the quarter with about 2,910 customers with ARR of $100,000 or more, up from about 2,250 last year. The customers generated about 85% of our ARR. We generated free cash flow of $116 million with a free cash flow margin of 24%. Our platform strategy continues to resonate in the market. As of the end of Q1, 81% of customers were using two or more products in line with last year.
43% of customers were using 4 or more products, up from 35% a year ago. 19% of our customers were using 6 or more products, up from 12% last year. Now let's discuss this quarter's business drivers. Overall, we experienced business conditions that were similar to the previous several quarters. In Q1, users growth from existing customers came in roughly as expected. We saw existing customer users growth in Q1 improve from the levels we saw in Q4, but remain a bit lower than the levels we experienced in Q2 and Q3. As in recent quarters, we continue to see customers optimize their cloud spend, particularly those further along in their cloud migration and hosting a larger portion of their infrastructure in the cloud.
Our new logo acquisition and bookings in Q1 were solid for what is a seasonally slower quarter. New logo bookings reached a new record for a Q1 and were up slightly from last year as we continue to add many promising new logos, which I'll discuss in a bit. With our land and expand model, we expect many of these new logos will turn into much larger customers as they adopt more of our products over time. Despite a more cost-conscious demand environment, we have continued to land new customers and expand existing ones, and we are very proud to achieve several key milestones in Q1. First, our total ARR exceeded $2 billion for the first time. A true achievement for all of us at Datadog, even though we all know we're only getting started.
Our APM Suite and Log Management products together exceeded $1 billion in ARR. This demonstrates the expansion of our business well beyond our first Infrastructure Monitoring product and our successful execution on the broad observability platform. Remember that our APM Suite includes four Datadog products, core APM, Synthetics, Real User Monitoring, and Kubernetes Profiler. We continue to make steady progress with our cloud security product with continued growth in ARR and in customers. I'm very pleased to announce that we now have more than 5,000 customers using our cloud security products. Let's move on to R&D. We introduced a number of new security capabilities last month. We announced the general availability of Application Vulnerability Management, which provides visibility into the attack surface of production environments by automatically surfacing vulnerabilities.
Instead of submerging users with thousands upon thousands of vulnerabilities, this new functionality uses observability data to prioritize risks based on the estimated impact to the business. Closes the loop between security operations and development teams. We also introduced a number of new capabilities to our Cloud Security Management product. Workload Security Profiles allow customers to flag anomalous activity and improve overall accuracy of threat detection directly within their workload. We now offer vulnerability detection for containers, automatically scanning live container images for known vulnerabilities. Moving on from security to observability, we also announced the general availability of Data Streams Monitoring. This product specifically targets queuing, streaming, and event-driven pipelines such as Kafka or RabbitMQ. These systems often span many different teams and technologies and are notoriously difficult to manage and troubleshoot. For this, even standard APM and Log Management solutions are not specialized enough.
Data Streams Monitoring automatically identifies the topology, interdependencies, and key metrics of complex streaming data pipelines, allowing customers to maintain availability, correctness, and latency for what is now a critical part of their business. We were thrilled to unveil our newest data center in Japan last month. We see a large opportunity to serve our customers in the Asia Pacific region, which has seen significant growth over time and now represents high single digits as a percent of our revenue. I also want to take a moment and share our excitement for the latest wave of AI innovation. I'm going to use AI indiscriminately here to refer to the recent advances in deep learning, large language models, and generative AI. From a market perspective, over the long term, we believe AI will significantly expand our opportunity in observability and beyond.
We think massive improvements in developer productivity will allow individuals to write more applications and to do so faster than ever before. As with past productivity increases, we think this will further shift value from writing code to observing, managing, fixing, and securing live applications. In the short to medium term, we believe the rise of AI will increase the demand for compute and storage to train and run models, but it will also increase the value of proprietary data and further drive digital transformation and cloud migration, as these are all prerequisites for adoption. We also do expect quite a bit of noise in the market as the technology stack is progressing and changing very quickly. From a product perspective, we believe that we at Datadog are uniquely positioned to deliver value to our customers in this new world.
First, we built Datadog from day one as a pure SaaS business precisely to be able to put our data to work at full scale and to train models to solve our customers' problems. Second, our large surface of contact with our customers gives us the insertion points to make AI relevant. This is where we see the value of having a variable customer base and being designed to be used every day by every single engineer. Third, we serve today some of the largest builders and consumers of AI services and are quickly adapting to their needs in a rapidly changing field. In other words, we are really excited about the potential of AI for us and for the observability and security markets. I'm sure we'll discuss this topic further in the future. Okay, let's move on to sales and marketing.
As I said earlier, our go-to-market teams had another productive quarter, so let's discuss some of our wins. First, we signed an expansion into 8 figures ARR with a leading AI company. This customer saw an order of magnitude increase in user demand and a surge in new customers following enormous innovation and interest in generative AI. As a result, this customer now uses six Datadog products and relies on our platform to track and correlate key business metrics, ranging from uptime data to new user subscriptions and revenue. Next, we signed a high 7 figures expansion to another 8-figure ARR deal with one of the world's largest fintech companies. This customer has expanded meaningfully over time, and today sees Datadog platform used by thousands of users across dozens of business units.
With this expansion, this customer now uses 14 Datadog products and is consolidating multiple open source, homegrown, and commercial tools across observability and security into the Datadog platform. Next, we signed a seven-figure expansion with a Fortune 500 healthcare company. Before using Datadog, major incidents would mobilize up to 150 employees for an average of 3-4 hours. With Datadog, they only need 20 employees for about 30 minutes, with an opportunity to further reduce these numbers. I will note that we're also replacing a commercial observability competitor whose new pricing model was causing an increase in cost with lower value. This customer now expects to save more than half a million dollars every year by moving that to Datadog across several business units. Next, we signed a six-figure land with a multinational clothing company.
This company was previously heavily siloed with each team using different monitoring tools. As is often the case, this caused issues impacting revenue and customer experience. This customer is starting with 5 Datadog products and expects to consolidate and replace a total of 13 commercial and open source tools with Datadog. Last but not least, we signed a $7-figure multi-year land with a leading university in Australia. This customer had historically relied on open source solutions. They evaluated a few commercial competitors, and Datadog won as their requirements involved both cloud and on-premise across log, user experience, and network device monitoring. This customer plans over time to migrate from more than 10 tools to the Datadog platform. That's it for this quarter's highlight. I'd like to thank our go-to-market teams again for their continued execution in Q1. Now switching gears, let me speak to our longer term outlook.
Overall, we continue to see no change to the multi-year trend towards digital transformation and cloud migration. We do continue to see customers optimizing their cloud usage and visibility remains limited as to when this optimization cycle will end, but we firmly believe it will. As before, we remain confident that we will continue to deliver value to more customers in their digital transformation and cloud migration journeys. It is increasingly clear with each wave of technical innovation that every company in every industry, in every geographic region has to take advantage of the cloud, microservices, container and generative AI, and more. By relentlessly broadening the Datadog platform, we will continue to help our customers save on costs, execute with greater engineering efficiency, drive competitive differentiation, and deliver value to their own customers. Our long-term plans have not changed.
We are continuing to invest to capture our long-term opportunities. As David will discuss in a moment, the strength of our business model allows us to balance that with delivering financial performance. With that, I will turn it over to our CFO. David?
David Obstler (CFO)
Thanks, Olivier. In Q1, we continued to execute well and deliver value to our customers. Revenue was $482 million, up 33% year-over-year and up 3% quarter-to-quarter. To dive into some of the drivers of the Q1 performance. First, we had an unusual outage in March, and we estimate that the impact to our revenues from that outage to be about $5 million. As we mentioned last quarter, we saw subdued usage growth in the month of December, which created a lower growth trajectory to start the Q1 and drove seasonally weaker, sequential growth in the Q1. During Q1, we experienced a linearity pattern that is typical for us, which included usage growth in March that was higher than that in January and February.
Overall, we saw existing customer usage growth in Q1 improve from the levels we saw in Q4, though it was slightly lower than the levels we experienced in Q2 and Q3 last year. We continued to see larger spending customers grow slower than smaller spending customers. From an industry perspective, we continued to see the slowest growth in the consumer discretionary vertical, particularly in e-commerce and food delivery. Geographically, we saw faster year-over-year growth in international than in North America. Our trailing twelve-month dollar-based net retention rate, or NRR, continued to be over 130% as customers increased their usage and adopted more products. Based on our current growth trajectory, however, we expect our trailing twelve-month NRR to be below 130% in Q2.
While our net retention rate is expected to go below 130%, we continue to execute strongly on our platform innovation and our land and expand business model, as evidenced by our latest product announcements, our expanding cross-sell of products, and the examples of the strong Q1 renewals that Olivier discussed. Our dollar-based growth retention rate remains stable in the mid to high nineties, an indication of the mission-critical nature of the Datadog platform for our customers. Moving on to our financial results. Billings were $511 million, up 15% year-over-year. We had a large upfront bill for a client in Q1 2022 that did not recur at the same level or timing in Q1 2023. Pro forma for this client, billings growth was in the low 30s% year-over-year.
Remaining performance obligations or RPO was $1.14 billion, up 33% year-over-year. Current RPO growth was in the high 20s% year-over-year. We continue to believe revenue is a better indication of our business trends than billings and RPO, as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts. Let's review some key income statement results. Unless otherwise noted, all metrics are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release. Gross profit in the quarter was $388 million, representing a gross margin of 80.5%. This compares to a gross margin of 80.6% last quarter and 80.4% in the year-ago quarter.
We continued to experience efficiencies in cloud costs reflected in our cost of goods sold this quarter. In the mid to long term, we continue to expect growth margin to be in the high 70% range. Our Q1 non-GAAP OpEx grew 45% year over year. This is a decline from 54% year over year growth in the previous quarter. We continue to grow our headcount in R&D and go-to-market, but at a more moderate pace than last year. Q1 operating income was $86 million or an 18% operating margin, flat sequentially to Q4 2022 margin also of 18%. In the year ago quarter, operating margins was 23% and it benefited from lack of in-person office travel and event costs due to our COVID policies during the pandemic.
Turning to the balance sheet and cash flow statements, we ended the quarter with $2 billion in cash equivalents, restricted cash and marketable securities. Cash flow from operations was $134 million in the quarter. After taking into consideration capital expenditures and capitalized software, free cash flow was $116 million for a free cash flow margin of 24%. Now for our outlook for the Q2 and the rest of fiscal year 2023. In forming our guidance, we continue to use conservative assumptions as to the organic growth of our customers compared to historical periods. As usual, we are basing our near-term guidance on recent activity we see with our customers.
While existing customers are still expanding with us, we continue to assume in our guidance that cloud optimization is affecting their expansion rate for the rest of 2023. For the Q2, as a result, we expect revenue to be in the range of $498 million-502 million, which represents 23-24% year-over-year growth. Non-GAAP operating income is expected to be in the range of $82 million-86 million, and non-GAAP net income per share is expected to be in the $0.27-0.29 per share range based on approximately 349 million weighted average diluted shares outstanding.
For the fiscal year 2023, we expect revenue to be in the range of $2.08 billion-2.10 billion, which represents 24-25% year-over-year growth. Non-GAAP operating income is expected to be in the range of $340 million-360 million, non-GAAP net income per share is expected to be in the range of $1.13-1.20 per share based on approximately 351 million weighted average diluted shares outstanding. Some additional notes in our guidance. First, we have continued to balance near-term financial strength with investment in our large long-term opportunities, and we are executing well on our plans to invest efficiently.
We expect the continued moderation of headcount growth and the lapping of the COVID-affected historical expenses to result in continued slowing of OpEx growth during the remainder of 2023. We now plan to grow our non-GAAP operating expenses, excluding COGS, in fiscal year 2023 by approximately 30% year-over-year, with an exit rate in Q4 in the low 20s% year-over-year. We continue to expect net interest and other income for fiscal year 2023 to be approximately $75 million. We expect our tax expense in fiscal year 2023 to be in the range of $14 million-16 million. Finally, we continue to expect capital expenditures and capitalized software together to be in the range of 4-5% of revenues in fiscal year 2023.
Finally, to reiterate Olivier's comments, we remain excited about our long-term opportunities as our customers embark and expand on their cloud migration and digital transformation plans. We are continuing to invest to further expand the ways we reach our customers and help them along these journeys. I wanna thank our Datadogs worldwide for their efforts in this quarter. With that, we will open the call for questions. Operator, let's begin the Q&A. Thanks.
Operator (participant)
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Raimo Lenschow with Barclays. Your line is now open.
Raimo Lenschow (Managing Director and Senior Equity Research Analyst)
Thank you. Hey, good morning. could you speak to the optimization, Olivier, a little bit more in detail? Obviously it's a journey for customers, and there's like these initial steps and then there's follow-on steps. If you think about the customer behavior in terms of what they do on optimization, are you still seeing the same steps that are getting taken or are we going to kind of round two, round three, et cetera? I just try to understand a little bit where we are on that optimization journey, if you have more color, and then I have one follow-up, please.
Olivier Pomel (Co-founder and CEO)
The short of it is, we don't know exactly yet. I'm going to give an answer that's gonna be very similar to the answer I gave last quarter. We see customers taking another bite at their own workforce we saw it in a number of companies this morning actually even. I don't think customers themselves know where they're done. We're very prudent in terms of assuming an end to it in the near future. When we look at all data, when we look at what we hear from the hyperscalers also, we also listen carefully to their commentary on what they foresee in the near future.
We don't see anything that gives us confidence that we can call an end to optimization, you know, next quarter or the quarter after that. As far as our guidance goes and our plans for the year, we assume that this is going to continue at a similar level for the rest of the year. Obviously, when we look at our customer base, you know, we see some customers that obviously seem to be done with it and others that, you know, haven't done anything. You know, we try to keep an eye on that and model it, but we're not including any of that, you know, guidance.
Raimo Lenschow (Managing Director and Senior Equity Research Analyst)
Yes. Okay, perfect. David, on the cost side, so thanks for giving us the OpEx rate for the year and the exit rate. If you think about there's always that in that situation of investing for the future, and at some point you do need to come out versus like, you know, surviving or like living in the current environment. How do you think about that investment philosophy of balancing like, you know, today versus getting ready for tomorrow? Thank you.
David Obstler (CFO)
I would say that we've made substantial and consistent investments both in our go-to-market and in our R&D over the last few years. This year, we're balancing continuing to do that with two things, with prioritization as well as injecting some optimization or efficiency into the investments we had made. We're seeing the opportunity to get returns from the previous investments and to think through a little more the prioritization of those.
Raimo Lenschow (Managing Director and Senior Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Please stand by for our next question. Our next question comes from Sanjit Singh with Morgan Stanley. Your line is open.
Sanjit Singh (Executive Director)
Thank you for taking the questions. I had a question, Olivier, on AI. It seems like we're on the cusp of another sort of compute cycle driven by AI. The last compute cycle, you guys were all over in terms of being ahead of the curve and in terms of the shift from monolith to microservices. With this new sort of compute cycle that we're about to embark on, you know, how are sort of applications and the sort of the application stack, how is that going to change, and what are the implications for Datadog as a monitoring vendor? What are potentially the puts and takes with in terms of how applications can be built going forward?
Olivier Pomel (Co-founder and CEO)
You know, first I'd say it's a, you know, in all the grades, a fascinating time to be alive, to see all these rapid innovation in the world of AI. The first thing I'd say is that it's still fairly early in terms of what the market is going to look like in AI world. Right now there's one particular thing that used to be very hard, which was in the building conventional models and chatbots and things like that, which almost overnight became almost a commodity basically. Anybody can incorporate in any application. It's an API call away. There is even a number of different options, you know, commercial open source you can use today. That just happened.
That one has massive traction. You see it everywhere. It also is opening the gate to many, many more I would say, more customized, deeper applications on AI that may be built by a few vendors or may be built by a large number of companies instead. It's not quite clear yet. What we see on our end is that it's going to drive more compute. It's going to drive more value in the data that is being gathered by companies. It's going to drive digital transformation. It's going to drive cloud migration because, again, you can't actually adopt AI unless you have the data.
You can't actually adopt it, you know, without having a modern architecture and an application you can scale up and down and infrastructure you can quickly provision and deprovision. You need to capture all of your to capture your data, you need to be digitally transformed, so you have data of all your customer interactions and everything that is proper to your business. In the midterm, we see that as a very clear accelerant to our business. Maybe, you know, with a little bit of noise, as I mentioned on the script earlier, in terms of what technologies end up being the winning ones and what technologies end up being fizzling, you know, after a few years.
You know, because it's still, it's so early and there's so much innovation that out of, you know, 200 new things, there's probably only 10 or 20 that will matter 2 years from now, but it's hard to know which ones it are today. Short answer is, midterm, lots more of the current workloads, types of workloads we see maybe with different sets of technologies. Longer term, I think we can all glimpse at a future where productivity for everyone, including software engineers, increases dramatically. The way we see that as a business is, you know, our job is to help our customers absorb the complexity of the applications they've built, so they can understand them, modify them, run them, secure them.
We think that the more productivity there is, the more people can write, in any amount of time, the less they understand the software they produce, and the more they do that, the more value, it sends our way. That's what makes us very confident in the long term here.
Sanjit Singh (Executive Director)
I appreciate the thoughts, Olivier. As a follow-up and getting back to sort of the topic of cloud optimization, what did you sort of see in April versus March? Typically, you sort of baseline what April typically looks like for the company. Are there any customers that are begun optimization that maybe didn't start in 2022? Are you seeing incremental new customer cohorts get on board the cloud optimization train?
Olivier Pomel (Co-founder and CEO)
I would say April is broadly consistent with what we've seen in Q4 and Q1. I think, you know, it's there's no major difference to call out there, and it's too early also for us to call the quarter, obviously. You know, there's nothing really sharp to point out about April. On the customer optimization, look, we have a large number of customers that are early in their cloud migration, early in the data lake adoption, and that are growing very fast. We haven't seen any optimization from those customers. It's possible we see optimization from some of those, which is why we remain very careful in our guidance.
We don't assume basically that the optimization will stop at the customer that already have done it, and that the rest of the customer base is going to be fine after that.
Sanjit Singh (Executive Director)
Makes sense. Thank you, Olivier.
Operator (participant)
Please stand by for our next question. The next question comes from Mark Murphy with JPMorgan. Your line is now open.
Mark Murphy (Managing Director and Head of U.S. Enterprise Software Research)
Thank you very much. David Obstler, looking at the math on this large upfront bill that did not recur, it seems to be about $65 million if I'm running that correctly. Can you possibly shed a little more light? For instance, will you recapture that or some of that in Q2? You know, what type of customer in customer dynamic is operating at that level? I have a quick follow-up.
David Obstler (CFO)
Yeah, that is a customer of ours. What we said was the billing frequency changed and the size. That customer's bill will, one, be spread out more, you know, over time. That company, that was a crypto company and continues to be a customer of ours, but that was an early optimizer. We had always talked that some of the industries that were most affected optimized. And that is. We will get that, we will get that bill at a smaller size than was billed last year, in a more of a, chunked up, billing way.
Olivier Pomel (Co-founder and CEO)
Look, this is one of those situations where, so this customer was in an industry that, or in vertical that got pretty much decimated over the past, over the past year. Their own business was cut in three or four in terms of their revenue. When that's the case, like we really work with customers to restructure their contracts with us. You know, we want to be part of the solution for them, not part of the problem. That's what we did here. We restructured their contract, you know, so we kept them as a happy customer for many more years, and do a deal that works for everyone with their business profile.
David Obstler (CFO)
Since we've been public, we've pointed out when we have an unusual bill. We don't have, you know, multiple of these types of situations. What we've done, if you look back through our commentary, is when we've had one of those, a change of timing or a change of the duration of a bill or a size of a bill, we've tried to pro forma it in order to give everyone a sense of what the rest of the business is doing.
Mark Murphy (Managing Director and Head of U.S. Enterprise Software Research)
Thank you. That's much appreciated on our part. As a follow-up, Olivier, congrats on passing $2 billion in ARR. You know, one of the fastest software companies ever to do that. Pretty amazing. I did wanna ask you as well on the optimizations. At the moment, Microsoft seems more optimistic that the optimization activity would start to normalize in the next couple or few quarters than Amazon does. When we tear it apart, Azure has less exposure to tech companies which are doing layoffs. They have more exposure to generative AI, which is booming relative to AWS.
I'm wondering if that part lines up with your telemetry and your forecasting that, perhaps your Azure monitoring business is gonna start to turn the corner sooner, then perhaps AWS would follow after that.
Olivier Pomel (Co-founder and CEO)
Yeah, you know, it's too early to tell. By the way, it's a bit hard to just project our numbers from the just as a reminder, it's hard to project our numbers from the numbers of the cloud providers because it, you know, it's not a one-to-one in terms of what they report and what concerns the infrastructure and the applications directly. Different cloud providers have different things in there. Also, you know, these vendors have, in addition to the volumes that track consumption on our end, they also have their own pricing dynamics, you know. Typically, in those situations, the vendors with the largest deals are the ones that get pressured the most, you know. In this case, that would be AWS.
You know, in terms of what we see in our data, there's nothing to suggest that any particular cloud is recovering from optimization just yet. We also try to read the hyperscaler comments and, you know, depending on what you've read before and after, you know, they look more or less positive, you know. I'm not quite sure I would project as much enthusiasm in the Microsoft comment. What we know is that at the end of the day, it doesn't really matter for us. We're equally well positioned to capture workloads on Azure as we are on AWS and GCP.
You know, the only part I would say of the Microsoft stack that we don't cover as well is everything that is a lift and shift of purely Microsoft technology Office or core IT, 'cause that can typically be done very well with the built-in Microsoft tooling. But when you think of any market share gain that might happen now on, from now on from Microsoft and the others, if you can imagine that would be a more cloudy workloads, nextGen workloads that have to gather data and call into AI models. These are things that we are very well positioned to capture.
Kash Rangan (Managing Director)
Excellent. Thank you very much.
Operator (participant)
Please stand by for our next question. The next question comes from Kash Rangan with Goldman Sachs. Your line is now open.
Kash Rangan (Managing Director)
Thank you very much. Appreciate it. I was curious, Olivier, that with generative AI, is it merely a fact of just waiting for these workloads to come on? Since you have such a strong presence in Infrastructure Monitoring, these workloads will just run on these big clouds and you will optimize them? Or do you have to do something specific on the product side to tool Datadog to better handle these generative AI workloads? I have a follow-up question.
Olivier Pomel (Co-founder and CEO)
Well, I think, you know, the, clearly there's going to be more productivity and, you know, we. The way this has played out in the past typically is you just end up generating more stuff and more mess, you know. Basically if 1 person can produce 10X more, you end up with 10X more stuff than that person will still not understand everything they've produced. The way we imagine the future is companies are going to deliver a lot more functionality to their users, a lot faster. They're going to solve a lot more problems in software.
There, there won't be as tight an understanding from their engineering team as to what it is they've built and how they've built it and what might break and what might be the corner cases that don't work and things like that. That's consistent with what we can see people building with a Copilot today and things like that, you know. These are very good for solving a small problem, but they don't help you build consistent code bases, or they don't help you build software platforms like that. That stuff is still out of reach.
Again, the way we see it in the future is, we'll see our customers do a lot more, but they will still need help to catch up with everything they are doing, and we'll be the ones to do that for them.
Kash Rangan (Managing Director)
Got it. Thank you so much. Also, Microsoft talked about the anniversary effect of optimization, that the headwinds would be less going forward, whereas AWS called out deceleration in the month of April. It looks like your business is still steady in the month of April. It's fair to say that you're sort of decoupling away from the AWS deceleration and maintaining the steady pace as far as consumption trends are concerned? That's it for me. Thank you.
Olivier Pomel (Co-founder and CEO)
Well, I mean, look, for the rest of the year, we're not assuming any change in trajectory, you know, so. Now, in terms of where we are compared to the other cloud providers, I mean, one thing you can do is you can look at the sequential growth numbers quarter-to-quarter, and you'll see that, you know, if you look at the 3 cloud, major cloud providers, they're decelerated to about 1% quarter-to-quarter growth for the last quarter. We're still significantly higher than that. And when you look at our ARR, you know, considering the fact that we exited slower in 2022 and we exited higher in, you know, Q1, 'cause the quarter is actually differently, you know, around the holidays.
We actually maintained an ARR that was a little bit higher also than the, an ARR growth that was higher than sequentially than the cloud providers. We already decoupled from the growth of the hyperscaler to a certain extent.
Kash Rangan (Managing Director)
Wonderful. Thank you so much.
Operator (participant)
Please stand by for the next question. The next question comes from Fatima Boolani with Citi. Your line is now open.
Fatima Boolani (Managing Director and Co-Head of U.S. Software Equity Research)
Hi, this is Joel on for Fatima. Thanks for taking our questions. Just to check on another vertical here. Given the continued uncertainty in the financial services vertical, just wondering if you could speak to your exposure here and perhaps any related behavior you're seeing with your customers, if at all. Just have a quick follow-up. Thank you.
Olivier Pomel (Co-founder and CEO)
We don't... I don't think we have numbers to share on the exact exposure to financial services. Obviously, it's been a growing vertical for us as the financial services are early adopters of software. I would say not necessarily early adopters of the cloud, but definitely an adopter at scale today of cloud technology. We haven't seen any changes in customer behavior on that side. That includes, you know, when we saw this trouble with SVB and, you know, other banks failing. We were still seeing great uptake from our products from financial services, new logos, as well as extension deals. Nothing to report on our end.
Fatima Boolani (Managing Director and Co-Head of U.S. Software Equity Research)
Okay. Okay, thanks. Appreciate the details there. Just, you mentioned the expansion deal with the large fintech, which displaced open source software in addition to other tools. Just wondering if you, if you could speak to the competitive dynamic versus open source, especially in this cost-sensitive environment. Why, you know, why Datadog still wins and, you know, perhaps works as a consolidation destination.
Olivier Pomel (Co-founder and CEO)
Yeah. I mean, the situation is very similar to what it's always been. You know, it's a, we win because we deliver more value. You know, at the end of the day, it works better and cheaper with what we do and what we provide than trying to build it yourself and mobilizing your own team and trying to stitch together different parts of open source. For some customers, they will still want part of that. They will still want to build some of it. You know, that's more of a cultural thing. For the vast majority of customers, it's not a rational thing to do. That's why we win in the end.
The dynamic there is remarkably unchanged from, you know, I could have said the exact same thing 10 years ago. Obviously, the open source projects were different, our footprint as a community was different, but the dynamics when we sold to customer were very, very similar.
Fatima Boolani (Managing Director and Co-Head of U.S. Software Equity Research)
Okay. All right, thank you.
Operator (participant)
Please stand by for our next question. The next question comes from Brad Reback with Stifel. Your line is now open.
Brad Reback (Managing Director)
Great. Thanks very much. Olivier, earlier you mentioned sort of the opportunity or, you know, your sort of focus on the Azure ecosystem. What types of things on a go-to-market perspective can you do to increase your penetration there as you've sort of historically been much larger inside of AWS? Thanks.
Olivier Pomel (Co-founder and CEO)
Also, there's a lot of things we're doing, you know, whether that's working directly with other cloud providers in addition to our very strong relationship with AWS. Whether that's building more integration specifically into the ecosystem, technology integrations. If you look at our product announcements, you'll see that we've done quite a bit in partnership with Azure and Microsoft, for example. And, you know, Part of it is also expanding our sales force in territories that tend to lean more towards Microsoft in terms of their tech stack.
You know, when you look at the early customers we had, you know, which tended to be, you know, a lot of software companies that used to be based on the West Coast in the U.S., that these typically didn't lean hard Microsoft. When we look at the more recent enterprise teams we studied the past few years, say, for example, in U.S. central areas, like these tend to be way heavier on the Microsoft stack. It's a combination of all of the above, basically. Like, there's not just one single thing we do.
It's a lot of different things at many different levels to make sure that, we have the right product to show in front of the right customer and have the right sales force to enable that.
Brad Reback (Managing Director)
That's great. Thanks very much.
Operator (participant)
Please stand by for our next question. The next question comes from Matthew Hedberg with RBC. Your line is open.
Matthew Hedberg (Managing Director and Head of Global Technology, Information, Media, and Telecommunications)
Great. Thanks for taking my questions. Thanks for the APM Log Management data point over $1 billion in ARR. I'm wondering, can you provide a frame of reference for maybe the growth of these two businesses versus core infrastructure and maybe between the two APM and logging? Are they about equal in size or is one sort of relatively larger than the other?
Olivier Pomel (Co-founder and CEO)
Order of magnitude is the same. I mean, we're not going to give, like, specific numbers there. The growth rates, it'll be. Of course, generally speaking, the smaller products grow faster than the products that are bigger than them. That's pretty much true about the whole set of products. The growth of all of the products has come down a little bit, you know, especially the ones that have a large volume component, like for example, logs, you know, where it is. When you think of optimization, like there is optimization that happens at the cloud provider level, and there's some that can happen at the observability level too. Overwhelmingly at the third key level that's logs, and everything that's for which customers have a different knob to turn.
For everything else, it's, the optimization corresponds to, with the cloud provider you see.
Koji Ikeda (Managing Director and Senior Equity Research Analyst)
Got it. Thanks for that. You know, on the outage that you, that you referenced, the $5 million. I'm curious, you know, what did you guys learn from that to prevent maybe this in the future? You know, outside of the $5 million hit that David talked about, is there any other repercussions from a customer perspective?
Olivier Pomel (Co-founder and CEO)
Well we've, we've made a lifetime of learning in a day, so that's the positive part of having an incident like that. I want to say, you know, I was personally very impressed by the response from our team. You know, we shared some information on a postmortem on what happened. You know, I encourage everyone to read it because it's a fascinating document. Because of the very wide nature of this issue, we ended up having three shifts of 500-600 engineers working on this outage. That worked, that part worked beautifully. Obviously, we've learned about a number of things beyond the root cause of the outage that is almost anecdotal.
Like it's one of those, you know, small things that can have a big impact, but I don't worry so much about it happening again. What we've learned is more about the various things we can do better to recover faster for our systems and to provide a better way for our customers to mitigate an issue when that happens. These are the most of the learnings and most of the new sources of work that we have internally to follow up on that to make sure that we reduce the chance of it happening again, and when it does, we recover faster and better for our customers. Overall, a very humbling experience, and I want to make sure that we do right by our customers in the future there.
We don't see any long-term impact, because the way we've handled it is by being very transparent with our customers about what was happening, and addressing any possible consequences with them after that. We think in those situations when you do things right and when you don't repeat these mistakes too often, the effect is actually to strengthen the relationship with the customer. I hope we succeed in doing that.
Koji Ikeda (Managing Director and Senior Equity Research Analyst)
Thanks for the color, Oli. Thanks.
Operator (participant)
Please stand by for our next question. The next question comes from Brent Thill with Jefferies. Your line is now open.
Brent Thill (Managing Director and Senior Equity Research Analyst)
David, just on the large customer adds, you were at 130 versus an average of 170 to 240 over the last 4 quarters. Any, any color there? Can you just talk to this is more customer selling because of the economy, or is this execution related? How would you characterize the large enterprise traction?
Olivier Pomel (Co-founder and CEO)
Yeah. A couple factors. One, Q1 is our seasonally lowest amount of new logo ARR. The Q1 this year was very similar. I think we said slightly higher than the year before and, you know, similar to our other quarters. That's one factor. Secondly, as we've talked about, most of our customers who are in that larger customer group aren't born there, but expand into that. When the organic growth rate goes down, you will naturally have a slower evolution or graduation of customers into that larger customer classification. Both of those factors caused that slowdown in that accumulation of customers over $100,000.
Brent Thill (Managing Director and Senior Equity Research Analyst)
Olivier, just a quick follow-up on the cloud optimization solution. Can you give us a sense of the traction and what you're seeing in terms of adoption there?
Olivier Pomel (Co-founder and CEO)
The adoption for what? Sorry, I missed the beginning of your question.
Brent Thill (Managing Director and Senior Equity Research Analyst)
You can build a cloud optimization solution to help your customers.
Olivier Pomel (Co-founder and CEO)
Oh, yeah.
Brent Thill (Managing Director and Senior Equity Research Analyst)
where there's potential opportunities. Are you seeing an uptake in that product?
Olivier Pomel (Co-founder and CEO)
Oh, yeah, we're seeing.
Brent Thill (Managing Director and Senior Equity Research Analyst)
Yeah.
Olivier Pomel (Co-founder and CEO)
We're seeing extremely strong demand for that, you know. This is definitely a product that customers want. We, and our immediate roadmap for it is very clear. That's, there's no doubt about it.
Brent Thill (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Please stand by for our next question. The next question comes from Koji Ikeda with Bank of America Securities. Your line is open.
Koji Ikeda (Managing Director and Senior Equity Research Analyst)
Hey, guys. Thanks for taking the question. Just one from me here in the interest of time. wanted to ask you a question on the Cloud Security Management platform and specifically the sales motion for it. how is that shaping up this year? how should we be thinking about the investments and strategy for that segment this year? as you attack that opportunity, how is the competitive environment been shaping up as you head into the deal bake-offs? Is it coming in as expected? Thanks, guys.
Olivier Pomel (Co-founder and CEO)
Yeah. There's no dramatic change from what we've seen before. Our focus is really on getting the product in as many hands as possible. It's, you know, as we mentioned on the call, it's working. You know, we have more than 5,000 customers on those products. This is really what gives us the basically closes the loop so that we can keep building those products and bring them all to maturity. The one thing I'll say is our strategy, our approach for security is ambitious in that we don't have we specifically are not trying to build a point solution. We're building, which means we're moving in many different directions at the same time for this.
Everything we do in terms of go-to market and driving customer adoption for that is in service of these product developments so we can build out that platform. With that in mind, the go-to market hasn't changed from what we've done before. We tend to land heavily on crossing over from DevOps teams into security. That's working well to get a lot more customer adoption. On the community side, there's no big changes there. You know, we see the same usual suspects as before. Their dynamics are a little bit different because they typically have narrower solution and more defined sell motions around those. We're very pleased with the customer adoption so far.
Koji Ikeda (Managing Director and Senior Equity Research Analyst)
Got it. Thank you very much. Thanks for taking the question.
Operator (participant)
Please stand by for our next question. The next question comes from Gregg Moskowitz with Mizuho. Your line is now open.
Gregg Moskowitz (Senior Analyst)
Thank you for taking the question. Olivier, you laid out a pretty compelling case for why generative AI will have a positive impact on Datadog and presumably the observability market at large, you know, both over the near to medium term as well as long term. Do you see any offsets, any partial offsets from organizations having greater intelligence and automation at their fingertips? Are there certain workloads that may no longer need to be monitored by an observability platform?
Olivier Pomel (Co-founder and CEO)
Look, in the long-term future, everything is possible. Today, I don't think that's in the card. That's not, you know, what we hear or see. I think the again, the workloads are getting more complex as the intelligence and management is getting better. We see basically a continuation of that. In terms of what customers do today, like, it's hard to project the current adoption of AI into what it might look like into the future because right now, AI is mostly used as an API call for most companies. We don't think it's necessarily going to be the case, you know, 1, 2, 5 years from now.
Gregg Moskowitz (Senior Analyst)
Okay. Got it. Thanks. Just for David on the outage, are the credits, et cetera, is that now fully behind you, or is there any lingering, financial impact in the Q2 that you're embedding in the guide? Thanks.
David Obstler (CFO)
Yeah. We, you know, provide for what we know in our, you know, at time in our accruals. We believe that we've provided for that through the revenue impact in Q1.
Gregg Moskowitz (Senior Analyst)
Okay. Thanks very much.
Operator (participant)
Please stand by for our last question. The last question comes from Mike Cikos with Needham. Your line is open.
Mike Cikos (Senior Analyst)
Hey, guys. Thanks for getting me on here before the end of the call. I guess a question for Oli. The first question is really around the ARR discussion. I appreciate the color you guys provided around that APM and Log Management. Can you highlight is Datadog winning new customers on pure APM and logging at this point, or is infrastructure still the heavy lean as far as where those new logos are being predominantly won? Then secondarily, can you talk to maybe some of the newer products in the portfolio which are seeing the strongest uptake today, just given we have, I think it's 17+ modules in the portfolio more broadly. Just where should we be focusing when thinking about, you know, growth going forward from here?
Olivier Pomel (Co-founder and CEO)
Yeah. Look, motion is still to land with infrastructure, you know, APM and/or logs when we start. I would say it's getting increasingly difficult to separate all of those because the observability market in general is converging into, I think, all three under one roof. You know, it's whether customers start the conversation about APM or logs or whether they start it over from infrastructure, it doesn't matter, you know, a ton, you know, when we land new customers. I would say though that, you know, we definitely have best-of-breed products also in APM and logs, you know, and those products win on their own.
Sometimes, you know, when we enter a new customer that already have other solutions for other things, you know, we can start by displacing a vendor on the APM side or the log side and expand from there. That's definitely something that we do on a regular basis. On the question of the products that are growing the fastest. Look, all the newer products are actually getting pretty good uptake, so it's hard to pick one. I mentioned earlier. Cloud Cost Management is actually a very popular product right now. Still very early in Cloud SIEM, but it's a very popular product.
We also see a lot of interest actually for some of the new products we announced at Dash last year and some of which are still not generally available. There's a number of things we're doing in terms of automating response to issues and automating workflows and sorting through issues and managing issues through their lifecycle that are getting a lot of attention from customers today too. We're excited about what's coming next. Obviously, the expectations for some of those products are changing over time too. Now that everyone can see what can be done with AI, you know, we, everybody expects to see a lot more of that. I guess we'll share more on that in the near future.
Mike Cikos (Senior Analyst)
Terrific. Looking forward to it, and thank you very much for the color.
Operator (participant)
I would now like to turn the call over to Olivier for closing remarks.
Olivier Pomel (Co-founder and CEO)
Thank you. I want to thank again, everyone at Datadog for crossing these really important milestones. Obviously, we're already focused on the next ones. I want to thank everyone for the hard work, shipping product, getting in front of customers. I also want to thank our teams for responding to that system outage we had and our customers for very kindly, you know, working with us, you know, through that. On this, I will speak to you again after Q2.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.